Sunday, March 29, 2009

Millions of Americans cannot believe what is happening to them, and with good reason. Most of the nation's working-aged population (anyone under age 45) has never experienced a recession this bad, including many of the business executives who have steered their companies into bankruptcy. The last severe economic downturn--at least equivalent to what we are experiencing today--occurred in the early 1980s. Consequently, too many Americans thought the good times would just keep on rolling: the value of their home would only increase, the stock market would be a safe place to park their college and retirement savings, and there was little chance they would lose their job.

The results of a 2009 MetLife survey reveal the grim consequences of that kind of magical thinking. The survey finds that many Americans have no safety net, so confident were they in a prosperous future. An astonishing 28 percent of currently employed workers say they would not be able to pay their bills after less than two weeks of unemployment. Within a month, half of American workers say they would be unable to meet their financial obligations.

This lack of a Plan B explains why the country is in such a panic. The 56 percent majority of the employed are concerned that they could lose their job in the next year, according to MetLife. Fifty-nine percent of the employed fear that if they lose their job, they might have to file for bankruptcy. An even larger 64 percent of employed homeowners are afraid that a spell of unemployment will mean the loss of their home. Overall, three out of four respondents admit that they lack an adequate safety net. Welcome to the American Nightmare.

Although the pundits often scold Americans for being too deeply in debt, in fact debt is not the problem. The average household owes a relatively modest amount, according to the Federal Reserve Board's Survey of Consumer Finances. The problem is the precarious income stream that keeps so many families afloat--an income stream now threatened by the deepest recession in a generation. If the stream dries up, as it is for many, then debt becomes a problem because there is no backup plan.

Are we finally learning a lesson? Will we be humbled by the hard times? Not likely. The freewheeling cowboy culture is too deeply ingrained in the American psyche. To see it in all its glory, take a look at a new study from the Economic Mobility Project. This organization, which tracks the economic mobility of the American population, fielded a survey in late January and early February--a time when you might think the public would be chastened by events. But you would be wrong. Rather than rethinking the rules of the game, most Americans are still cheerleaders for the American Dream--even as it turns into a nightmare. When asked to define the Dream, the top three qualities mentioned by survey respondents were the freedom to accomplish anything (74 percent), the freedom to do what you want (68 percent), and children being better off financially than you (64 percent). Huh? Aren't those the same Anything Goes, Me First, and Bigger is Better ideals that got us into this mess?

Even now, Americans overwhelmingly credit success to individual characteristics rather than structural factors. Hard work and ambition are the top two factors behind success, say 89 to 92 percent of us. Fewer than half think people get ahead because they are born into the right family, know the right people, or are just plain lucky. And what about the poor wretches on whom hard times have fallen? They should not look to their fellow Americans for sympathy. The largest share of the public, including both conservatives and liberals, say the downward mobility so many are experiencing is due to "poor life choices." In other words, it's not the economy, stupid.

In 2007, a record 4,317,000 babies were born in the United States. It took exactly 50 years to break the old record of 4,308,000 established in 1957. So the answer is no, we are not in the midst of another baby boom. Here's why.

For one thing, the U.S. population has almost doubled since 1957, climbing from 152 million to 302 million--yet only now have American women managed to produce slightly more babies than they did half a century ago. The average woman of 1957 could expect to have 3.77 children in her lifetime. Today, the average woman will have only 2.12.

The fertility rate of 1957 was 122.9 births per 1,000 women aged 15 to 44. Today the fertility rate is just 69.5. Granted, today's figure is higher than the all-time low of 63.6, which we hit in 1997, but the increase is due more to the changing demographic composition of American women than it is to a new baby boom.

Hispanics account for a growing proportion of women aged 15 to 44, and Hispanic fertility is far above average. In 2007, the Hispanic fertility rate was 102.1--not far below the average fertility rate of 1957. Among non-Hispanic whites, in contrast, the 2007 fertility rate was just 60.1. Hispanics account for one in four births in the United States today. Of the 52,000 additional babies that put us over the top in 2007, 44 percent were Hispanic, 27 percent were Asian, 19 percent were black, and 7 percent were non-Hispanic white.

Monday, March 09, 2009

In a recent online poll, Time magazine asked its readers who was most to blame for the current economic crisis. Readers rated the guilt of 25 different people on a scale of 1 (innocent) to 10 (guilty). On that scale, the American Consumer rated an 8--even guiltier, according to the public, than George W. Bush or Alan Greenspan. "We've been borrowing, borrowing, borrowing," explained Time, "living off and believing in the wealth effect, first in stocks, which ended badly, then in real estate, which has ended even worse."

But is the American Consumer guilty as charged? Just in time to shed some light on the matter, the Federal Reserve Board has released the long-awaited results of the triennial Survey of Consumer Finances. The latest survey, taken in 2007, reveals the economic status of the average American household at the peak of our supposed profligacy. The survey results turn out to be a friendly witness, presenting evidence not of our guilt, but of our innocence. Yes, the results show our 2007 net worth swollen by inflated housing prices and they reveal the rush of money into real estate. But as in previous years, the results disprove the notion that the average household is deeply in debt.

Let's hear the evidence.

Exhibit 1: For the average household, debt is modest. The median amount of outstanding debt for households with debt (77 percent of all households) stood at $67,300 in 2007. This figure includes mortgage debt.

Exhibit 2: Most debt is mortgage debt. Seventy-five percent of the debt owed by the average household is the mortgage on their primary residence. Even this debt is not overwhelming. The median ratio of mortgage debt to housing value stood at 53.3 percent in 2007. Only 1 percent of homeowners had mortgage debt greater than the value of their primary residence.

Exhibit 3: Home equity loans are not common. Only 18 percent of homeowners had a home equity line of credit, and an even smaller 12 percent had an outstanding balance on a home equity loan. This proportion has not changed since 2004.

Exhibit 4: Few gambled in the housing market. The percentage of households with debts for "other residential properties" (second homes, rental units, investment properties, etc.) climbed between 2004 and 2007, rising from 4.0 to 5.5 percent. According to the Federal Reserve Board, this was the largest increase in the prevalence of debt among all types of debt, evidence of the rush to real estate during the housing bubble. Yet 94.5 percent of households did not drink the Kool-Aid.

Exhibit 5: Credit card balances are modest. Only 46 percent of households carried a balance on a credit card in 2007--a figure that was unchanged from 2004. The median outstanding debt for those with a credit card balance was just $3,000. Among households with bank-type credit cards, 55 percent say they pay their balance in full each month. The average credit card bill last month? Just $250.

Exhibit 6: Only a handful are in trouble. Only 14.7 percent of debtors owed more than 40 percent of their income, up slightly from the 12.2 percent of 2004. Despite this increase, the percentage of debtor households that were 60 or more days late in making a payment fell from 8.9 to 7.1 percent between 2004 and 2007.

The evidence proves that the average American household was on solid financial footing as of 2007. Consumers did not cause the financial crisis. The widespread belief that overconsumption is responsible for the meltdown is rooted in several factors such as falling prices for clothes, electronics, and many other goods (allowing people to buy more with less) and the presence of the large baby-boom generation in the peak spending lifestage.

But the saga continues. Although the Survey of Consumer Finances was taken in 2007, the Federal Reserve Board's analysis examines the impact on households of the financial collapse through October 2008. Housing values took a hit. The home equity of homeowners with mortgages fell from $91,000 in 2007 to $71,600 as of October 2008. The median ratio of mortgage debt to housing equity among homeowners with mortgages climbed 5 percentage points to 58.5 percent. The median value of the stock held by households fell from $35,000 to $22,500 between 2007 and 2008. Net worth also fell. In 2007, median household net worth stood at $120,300. By October 2008, the figure was down to $99,000, according to Federal Reserve estimates.

The sky has not fallen--yet. Note that even after the decline, the net worth of the average household is still very much positive--higher, in fact, than it was in 1998 after adjusting for inflation. But if in its soul searching the American public fails to place the blame for the financial crisis squarely where it belongs--on the financial institutions and government regulators who did not do their job--then consumer confidence will continue to fall, the recession will deepen, more will lose their jobs, and household wealth will plummet. The sky will fall.

Yes, the homeownership rate is down. According to the the latest numbers from the Census Bureau, 67.8 percent of households owned a home in 2008, down from 68.1 percent in 2007--a small decline, considering all the ink that has been spilled over the housing crisis. The 2008 homeownership rate remains close to the record high of 69.0 percent reached in 2004 and still exceeds the 67.4 percent of 2000.

Homeownership fell in most age groups, but not by much. The biggest decline occurred among householders aged 30 to 34. Many were first-time homebuyers who bit off more than they could chew during the housing bubble and have been forced to give up the dream of homeownership for now.

The biggest lesson to be learned in the statistics on homeownership is the comforting stability of demographics, which offer a way to approach the future that is resistant to "black swans" (unanticipated radical change, a term popularized by Nassim Nicholas Taleb in his book The Black Swan). In the absence of natural disasters such as Katrina, demographic trends offer a stability that is sorely needed as Americans confront a chaotic economy.

ABOUT ME

Demographer and editorial director of New Strategist Press, Cheryl Russell is the former editor-in-chief of American Demographics magazine and The Boomer Report. She has written numerous books about demographic trends. Ms. Russell is a professional demographer with a master's degree from Cornell University.